Private sector 'will be smaller than in 1998'

Britain's private sector will be smaller in the first year of the next
government than it was when Labour was first in office, it has emerged.

By Edmund Conway

9:39PM BST 15 Aug 2009

In calculations which underline the catastrophic collapse in Britain's non-public sector economy under Labour, experts have revealed that the private sector will by next year have suffered a "lost decade" of less-than-zero growth.

The economic output of the private sector next fiscal year will be around £706.1bn – lower than the inflation-adjusted £708.9bn it amounted to in 1998/99, the first full fiscal year of the Blair government. The figures, calculated by the Policy Exchange think tank, show that in that same period the size of the public sector ballooned by some 63pc.

The figures are based on the assumption that the UK economy will shrink by 4.5pc this year, as predicted by experts such as the Ernst & Young Item Club, but does not contract any further next year.

Andrew Lilico, chief economist of the Policy Exchange, said that the collapse in the private sector was partly a consequence of the recent economic crisis and partly a result of the "crowding out" of business growth by almost unprecedented spending by the state over the past decade.

"Because government spending has risen in this recession it's both covered up and crowded out an absolutely massive contraction in the private sector," he said. "By contrast, under the previous Conservative government, the private sector grew."

The think tank's calculations show that during the combined Thatcher and Major Governments, from 1979/80 to 1997/8, the private sector grew by a total 66pc, while the public sector expanded by a far less dramatic 29pc. Economists believe that countries with larger private sectors generate more wealth and grow faster. A large public sector must, on the other hand, be funded by onerous taxes.

Gordon Brown came under repeated criticism both as Chancellor of the Exchequer and more recently as Prime Minister for spending excessively on the state, despite evidence that much of the cash had been used inefficiently. As a result, in the run-up to the recent financial and economic crisis, Britain had the biggest structural budget deficit – in other words adjusting for the economic cycle – of all the major Western nations.

Making matters worse, since the crisis Mr Brown has ordered a major public spending initiative, which will help drive Government borrowing towards the £200bn level both this year and next. Although most economists agree that it makes sense for governments to borrow and spend during recessions to help their economies recover, these new calculations on the relative sizes of the public and private sectors raise deeper questions about the structure of the UK economy. According to Mr Lilico, Britain will enter the next decade with a public sector that is larger than for many decades.

He added: "The larger your state is relative to your economy, the slower you grow. So Labour, even if it loses the election, will be leaving us with 50pc of the economy being public spending – a massive share. The economy has become rather like a junkie, reliant on the hit of government spending. When that spending inevitably has to be withdrawn, it will be like having to go cold turkey – it will be very tough indeed."

The Conservatives have committed to shrinking the public sector if they take office, although they have not been specific about precisely which departments would have to suffer the biggest cuts. Under the Treasury's own plans, departmental spending will fall by 0.7pc between this and the next fiscal year .

Shadow chancellor George Osborne said: "This tells you everything you need to know about Gordon Brown's economic record – Britain will be paying the price for Labour's economic incompetence for years to come."